The Wall Street and London City Masters of the Universe thought they were "Smarter than Gravity." They were not. Now it is economics for the rest of us.

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Wednesday, April 3, 2013

Trouble at Canada's Big Banks? OSFI and Government Warnings

Canadians are known
for being overly cautious and too polite.Unless you give them a hockey stick….

Given this predilection
for caution, Canada is also known for having stable but boring and the most reliable economy in the G8/G20 group of countries.

advisor.ca

But is all well in the
land of the midnight sun? The Government is sending out warning signals.

In 2011, the Office
of the Superintendent of Financial Institutions (OFSI) made some rather un-Canadian
style comments. It was addressing the quality of the Boards of Directors
sitting at Canada’s big banks.Coming
from Canada’s banking regulator, it was a shocking to hear that some banks
lacked experience on their boards. Or as Stephen
Jarislowsky,CEO of Jarislowsky Fraser
Ltd., said "I find that there are many directors who are extremely nice
people and competent people, but very few bank directors who really know
banking.”Ouch!

This was followed
in July of 2012 with further statements from OFSI raising concerns about the
competencies of the boards with a particular focus on risk management. In
January of 2013, OFSI again raised board the issue of the bank
boards, including making improvements to the competencies of directors.

Most recently in March of 2013,
OFSI publicly put the “too big to fail” label on Canada’s six largest banks. This was surprising. Many industry observers had considered that only
the Royal Bank of Canada would warrant the TBTF label.As a result, these banks will have to
maintain a larger capital buffer and be subjected to stricter regulatory
oversight.

And then on 21
March 2013, Canada’s Finance Minister quietly dropped a bomb by including
‘bail-in’ provisions for Canada’s banks should they find themselves in
financial trouble.The bail-in
procedures were buried on pages 144 and 145 of the budget and smothered in financial
doublespeak, but the intentions are clear.As only an economist could write, Canadians were told that there could
be a very rapid
conversion of certain bank liabilities into regulatory capital. Written in plain English, this means that depositor’s money could be
grabbed fast to keep a bank going should it suddenly go broke. Presumably,
small time depositors holding less than CDN$ 100,000 would be protected by the
Canadian Deposit Insurance Corporation, but the budget does not enlighten us on
this area. (See http://tinyurl.com/cvcf9v9
for more on this.)

It may be cold comfort for Canadians, but
the USA and the UK are making similar plans.(See http://tiny.cc/z4jcuw for more on this.)

Assessment

Canada is not Greece
or Cyprus, but sovereign and personal debt levels are a concern. Much of the
so-called Canadian economic model from 2008 to 2013 has been funded though
personal debt which has now risen to over 165% of income. Continuous low level
interest rates mandated by the Bank of Canada has produceda ZIRP (zero interest rate policy) which is
distorting the economy and causing a mis-allocation of capital.(See more on ZIRP and Zombies at http://tinyurl.com/9wng9vf)

Conclusions

Canada’s ruling Conservative
Party government is known to be a “banker and business friendly” outfit, so this is
not an ideological attack. Indications exist that the Government and its
regulators have genuine concerns about Canada’s financial and economic
future.Overall, the measures appear to
be a response to internal problems (personal debt, TBTF banks, over dependence
on commodity exports etc.) as well as external factors (EU ongoing financial
crisis, US sovereign debt, PRC slowdown and monetary imbalances).

We are given to the
impression that this is a government clearing the decks as the ship sails into
a storm.

(There remains the
possibility that the Canadian government had its confidence shaken last year
following a massive theft from the maple syrup cartel headquarters in
Quebec.Who knew Canada had a cartel?)

About Me

Hi there! We here at the Honest Banker do not have PhDs in Economics like Ben Bernanke over at the US Federal Reserve. Nor do we have Harvard degrees like Governor Mark Carney of the Bank of Canada/Bank of England. We are not quants with math degrees. What we do have is practical education and honest experience. We contribute to the real world economy while trying to figure out how to survive and build value in our lives and our communities under the current economic model. This model has been dictated to us by economists and politicians using many of the same seriously failed economic models that gave us the financial collapse of 2007 and 2008.
This is “economics for the rest of us” who live in the real world and are trying to figure out how to survive in it despite what the financial sector is doing to us.